The System of Incentives for CEOS with Multitasks : Theory and Evidence from Chinese State-Owned Enterprises

The multitask agency theory argues that incentive devices for the agent need to be viewed as a system to induce balanced allocation of effort among the tasks. This important insight has not been incorporated into the empirical study of CEO compensation. Since there can be several measures for each of a CEO's tasks, incentive devices based on these measures can be complements or substitutes. However, the existing empirical literature on multitask agency only considers complementarity. This paper studies the complementarity and substitutability theoretically and empirically. Our empirical findings, based on a panel data set of CEO contracts from more than 300 state-owned enterprises in China, support most of the theoretical predictions. Our evidence also suggests that profits are not the only objective of the principal (the Chinese government) in designing CEO contracts. Our findings about the determinants of the incentive devices offer support to some notions in agency theory and the literature on incomplete contracts